It’s never too early to start teaching your kids these financial concepts.
Our kids have all heard us talk (or grumble) about money, the economy, and the stock market. If they listen to the radio, or glance at their phone, they hear or see the “Dow” mentioned as often as the weather. It’s fair to assume that this just sounds like white noise to them.
You might wonder what your kids are learning in school. And what they aren’t. Of course, every little kid learns about money denominations and about 20 different ways to combine coins to make a dollar. But traditionally, the really important info about money, the stuff kids will need to know as they enter adulthood, is either taught by their parents, or learned solo.
There are many aspects of personal finance that you may want to teach your kids at home. For instance, the importance of earning money, spending wisely, saving, and for many, giving back. For more on those topics, you can read Tips for raising a saver and 5 ways to teach your kids about money. But to give them a leg up on their future, why not teach them about investing and how financial markets work in ways they can easily understand? Here are some tips to get started.
1. Tell a story to teach the basics
MONEY MATTERS MADE EASY
Try telling your children this story and see their reaction: Suppose you own a small business, such as a lawn-mowing service, but you don’t have a lawn mower—and you don’t have enough money to buy one. What could you do to get more money to buy one? You could borrow it. Or you could invite some friends to share in the cost of your business—for a share of the profits, of course.
This is one way companies raise money when they need money to grow. They borrow it by issuing bonds—and then pay the money back with a set payment called interest. They can also sell stock. Stocks are like bricks in a building. If you own a brick, you own a share, or part of the building. Owning a stock means that you are a stockholder or a shareholder—part owner of the company. So you own a share of everything the company owns.
The place that people go to buy and sell stocks is called a stock exchange and it functions like a supermarket for shares of stock. There are many different exchanges that function together as a network; combined they’re usually referred to as the stock market. Only people called brokers are allowed to directly buy and sell shares of stock. But anyone can then buy stocks through a broker, like Fidelity.
Why do people buy stock? To make money. The goal is for your stock to be worth more in the future than it is today. If the company does well, you’d expect the value of your shares to go up and you could sell them for a profit. You could also hold onto your shares for as long as you want. In addition, you may also receive dividends, which are part of the company’s profits and are paid periodically to the company’s shareholders.
But it’s important to know that you can also lose money. For example, if the company performs poorly, your share prices could drop below what you paid for them. So before you invest in any company, get to know everything you can about them, their competitors, and the industry. Research can help you make more informed decisions.
2. Make the world your classroom
One of most important concepts to teach kids about the stock market is that it’s made up of companies that sell goods and services that many people need, like food, energy, and medicines; or want, like TVs and tablets.
Try using a supermarket visit to introduce this concept. As your child is picking out a favorite food or drink, ask them to read the label and discover who makes it. As you drive home, see if they can name the companies that make some of their other favorite things—toys, sneakers, cell phones. Now they know that there is a company behind the things that make up their world and the bonds and stocks issued by those companies are often available to be bought and sold by investors.
3. Teach them about supply and demand
To teach kids about supply and demand, try asking them about some of the products you or others may buy. Take soda, for instance. Ask your kids what they think it’s made of. If you have a bottle on hand, let them read the label. The ingredients will probably be carbonated water, high fructose corn syrup, artificial coloring, phosphoric acid, flavors; and perhaps, caffeine.
Now ask your kids about trends or things you may be trying to stress that might affect the soft drink market—like healthy eating. They might say that drinking water and juice are a growing consumer choice instead of soda.
As they share their observations, you can point out that they are witnessing the forces of supply and demand that can drive stock prices. The more people want the stuff companies create the higher the prices can go. Ask them about other products they really love. Ask them why their prices might go up or down. Maybe there’s a shortage or an extra supply. Help them understand the relationship.
4. Introduce research with a supermarket challenge
Next time you’re in the grocery store, challenge your children to look for some of the other products that soda companies own. Remind them of your earlier conversation and take them to the juice and water aisles. This challenge becomes a scavenger hunt as your kids look at water and juice labels and find products owned by soda companies.
Now they’re beginning to practice the research process that is key to successful investing. It’s rare to find a company these days that does only one thing. A supermarket scavenger hunt can help them understand that concept in a fun way.
5. Make the abstract real
Confucius once said, “I hear and I forget. I see and I remember. I do and I understand.” And once you’ve piqued a child’s interest in topics as complex as money and investing, it could be helpful for them to get hands-on. Consider sharing with them some of the companies, mutual funds, or exchange-traded funds you have invested in. What lessons have you learned? What do you wish you knew when you were younger? Explain why.
You can take the learning one step further by opening an account for your child. There are many different types of accounts for kids. Consider opening one, and investing in a mix of companies, including some that your child finds interesting. As the company announces a new product, makes news or the stock moves, you can build on what you started. Answer their questions, come up with ways to keep moving the conversation and the learning forward.
Enjoy the journey of helping your kids to understand the complex subject of investing by showing them how it connects to their world. They’ll be that much more prepared for their future.
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